The Seniors Housing Capital Environment: A Discussion with Jim Sherman
In the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, vice president of NIC MAP®, recently interviewed Jim Sherman, executive vice president, Seniors Housing for Beech Street Capital.
NIC: Congratulations on your recent appointment as Executive Vice President, Seniors Housing for Beech Street Capital. Can you provide us an overview of Beech Street, including products and some production numbers?
Sherman: Beech Street is a full-service, privately owned agency lender that provides financing for quality seniors, healthcare and multifamily properties nationwide. In 2011, Beech Street more than doubled its first year with over $2.2 billion in originations, and we are well on our way in 2012 with over $2.5 billion closed or rate locked year-to-date. Josh Rosen, based in Chicago, has been leading our healthcare FHA team, supported by seasoned underwriters who are broad based in seniors financing. I joined Beech Street to fully develop a comprehensive seniors housing platform and also to expand the base of clients. We have a Fannie Mae seniors license as well as FHA and are in the planning stages of rolling out a balance sheet program. We are currently in discussions to align ourselves with a bank(s) where we will participate in balance sheet loans. The organization is well established, has good connections with the capital markets, and strong capital support. Our goal going forward is to do approximately $150-175 million in FHA – this is just for seniors – and roughly $100 million+ in Fannie seniors. The volume of balance sheet loans will depend on the timing of the roll out of this product. We are committed to developing the balance sheet product as we realize it is important to be a significant player in the senior space.
NIC: Beech Street is well known as a multifamily lender, can you provide any background?
Sherman: We opened our doors late 2009, and closed in excess of $1 billion our first full year in 2010. We started with a Fannie license and then quickly received approvals from Freddie Mac and then HUD to participate in the FHA MAP and LEAN programs. In just over two and a half years, our servicing portfolio has grown to more than $5 billion representing over 480 loans. We’ve expanded to 11 offices throughout the country, east coast to west coast, south to north. We are now the third largest Fannie Mae DUS lender nationwide, and we continue to grow our Freddie Mac and FHA volume.
NIC: NIC MAP data shows a marked slowdown in deal volume throughout seniors housing and long term care in 2012. Just over $822 million traded hands in 2Q12, down from $10.9 billion in 2Q11. Has this slowdown in transaction volume flowed into the lending side of seniors housing?
Sherman: Yes, the lending volume for seniors has been down, even among the GSEs – I understand they anticipate lower production this year. We thought there was going to be a fair amount of refinancing because there’s a lot of Fannie Mae and Freddie Mac debt which is maturing during the ensuing couple of years. REITs have been very active in the acquisition market. Purchasing several billion dollars’ worth of seniors’ properties, they now own most of the larger portfolios, and it is expected the REITs will be paying off a significant amount of the debt they assumed with the acquisitions. Some of the REITs have access to capital at 2.5–3% and it’s hard for them to justify borrowing property secured debt having such low interest rates at these levels.
This could well change once interest rates start to tick up, or if the forecasts indicate the potential for significant rate increases, or if the market changes and the unsecured lines aren’t as accessible as they have been recently for the REITs. At that point – they may consider increasing their level of secured debt, but that could be 1.5-2 years from now. That said, I don’t think anyone expects the REITs to pay off all the secured debt but I think they’re most likely going to retire significant amounts of secured debt.
At Beech Street, considering the current market dynamics, in large part due to the activity of the REITS, and the flexibility of the GSEs, our focus is on the “middle market”. We anticipate a good deal of refinancing opportunities in that space. There are a number of middle market seniors’ operators which have not taken advantage of GSE debt and who when they understand the benefits of such, embrace it. Many of these sponsors have good operational and financial track records and are excellent candidates to refinance their debt. With rates continuing to hover at historic lows, this is clearly an excellent time to do so..
NIC: There has been much discussion lately of freestanding memory care development. In fact, a NIC MAP data shows that memory care is the fastest growing seniors housing property type in recent years. How comfortable are the GSEs with this property type, and can you comment on any trends you are seeing in this property type (possibly across markets as well)?.
Sherman: As you know, I worked with Silverado Senior Living, financing several of their properties, and, it is my understanding, Silverado’s Alzheimer’s (“ALZ”) and memory care properties were the first ALZ/memory care properties to be financed utilizing the Fannie Mae seniors product. Several years ago the GSEs did not have an appetite for financing stand-alone memory care properties. As with many lenders, the GSEs didn’t fully understand the operating and financial characteristics of these types of properties. Additionally, it is also important to note that it has taken years for lenders and Wall Street to begin to understand the market demand for such services. Thanks in large part to NIC data, lenders as well as others, have a better understanding for the dynamics and market demand for ALZ properties. Back then, we understood seniors independent living properties, assisted living, and CCRC, albeit the GSEs didn’t provide financing for CCRC, they understood and mainly worked financing seniors independent living and assisted living buildings. When the opportunity for Silverado to acquire four properties arose for buildings which they had been managing for one of the REITs, we looked at various financing alternatives for the acquisition financing. After evaluating the financial strength of the properties, the strong credibility and history of the sponsor, it seemed to make sense and appeared to be the right opportunity to present to Fannie Mae, and they agreed. Little did anyone know at the time that this would be the first of many such properties to be financed with Fannie’s assistance. From what I understand Freddie’s experience is a bit different due to their securitization mechanism. They’ve been completing securitizations for almost all their multi-family debt, and the investor appetite for seniors property types is not as strong. Freddie has begun to include seniors’ debt in the securitized pools, however, so this could improve over time..
The demographics and market fundamentals point to growing facilities with Alzheimer’s and memory care. You’ve seen the NIC data which indicates such. Assisted living occupancies are as high as they’ve ever been, and the average age of residents in facilities has increased only slightly. Operators have higher percentages of their resident population with memory impairment or Alzheimer’s, and often there is need for specialized units to adequately care for them. This is what’s driving the Alzheimer’s growth. And I’m seeing the growth in two areas: one is the construction of free-standing Alzheimer’s buildings, but also we’re seeing conversions of assisted living units within currently operating assisted living buildings to Alzheimer’s. I have been working with a client in Seattle that converted 20 units to Alzheimer’s about a year ago, and based on the success of these units, he’s starting to build another 20 units of Alzheimer’s care. You’re seeing more of this activity because the resident population demands this service. I think it’s the right time now because operators are now dealing with a stabilized, aging populations and if they don’t provide Alzheimer’s care in a dedicated portion of their properties they’re going to lose the residents..
But, in addition to Alzheimer’s and memory care, a significant part of our focus will be to help borrowers with refinance and acquisition opportunities in assisted living and independent living facilities, working with borrowers to provide a continuum of care and services to their residents..
NIC: So you see solid fundamentals in this sector?.
Sherman: Yes, very solid fundamentals. The NOI percent – and I emphasize the % – might be a little less than assisted living. I remember seeing the corporate presentation Loren Shook, CEO, Silverado, makes in which he compares Silverado’s net operating income on a per unit basis, Alzheimer’s to assisted living. While Silverado’s NOI percentage may be a bit less than assisted living facilities, the actual dollars earned on a per unit basis are quite a bit higher. ALZ revenues are higher, expenses are higher, but the overall dollars which fall to the bottom line are also higher. The fundamentals are very good. Also for Alzheimer’s there is considerable research being conducted regarding Alzheimer’s and one of the items being researched is the advantages or disadvantages of having double occupancy units available for ALZ residents. Some of the research indicates it is beneficial for residents – at least some residents – to live with a companion. If you can place two people in a room this will usually drive up revenues. There’s always going to be the need for single units, and there are going to be families that will want their loved one to be living in a single unit, but a number of operators utilize the double occupancy concept for Alzheimer’s and it works well.
Closed Sales Transaction Volume Down Dramatically in 2012
While 2011 registered total seniors housing and care closed sales transaction volume of $27.4B, 2012 has seen a significant decrease in volume through second quarter 2012. Speculation that the “low hanging fruit” has already been acquired by the large REITs seems evident by the slowdown in sales transaction volume starting in 4Q11. The industry was on a streak of closing large deals in the middle of 2011 but the momentum definitely subsided during the first half of 2012. Whereas seniors housing and care aggregated a total closed sales transaction volume of $15.9B during the first half of 2011, through the first half of 2012, closed sales transactions have totaled only having $2.1B.
As seen in the chart below, quarterly volume peaked with $10.8B in closed deals during the second quarter of 2011, with public equity, mainly REITs, buying 91% of that amount. As the REIT volume then started its decline, so did overall seniors housing and care volume, closing only $2.4B in 4Q11, $1.1B in 1Q12, and $.94B in 2Q12, with REIT/public equity volume representing 58%, 38%, and 29%, respectively. The recent REIT decline in share of closed volume has been replaced by private equity which has represented 59% of the buyer composition in 2012 through mid-year..
Another topic of much discussion is the pricing of properties within portfolio sales transactions. While 2012 sales transaction volume has slowed through June, portfolio transactions still make up two-thirds of the dollar volume. As highlighted in the most recent NIC MAP® Insights Newsletter, evidence exists that, all else held constant, a pricing premium of an estimated 34 percent exists on properties sold within a portfolio transaction..
MAP Local V2 Now Available
NIC MAP® has upgraded the MAP Local data service with enhanced functionalities to help owners, operators, lenders, investors and other key players in the seniors housing and care industry identify investment opportunities, benchmark performance, underwrite, close loans faster and much more.
With MAP Local V2, you can:
- Complete the due diligence process more efficiently and close deals faster
- Have access to a new Property Advisor Report that incorporates unit data on inventory, occupancy and rents; transactions data; three-year occupancy and rent trends at the segment level
- Compare competitive sets across metro boundaries not just within metro areas
- Utilize the interactive map to search local properties; and Export trend data and charts in Excel format directly to your desktop
NIC MAP® has improved the property search providing more in-depth company and industry data. Additions include::
- An interactive map with a visual presentation of competitors;
- Save searches and report functionality; and
- Unit data, RevPAR, transactions, and trends to the property report.
Contact John Blumer to schedule a demo and see what MAP Local V2 can do for you.
Not All Valuations Are Created Equal: Pricing Variables Today and Tomorrow
NIC is known for its stellar educational programming—the 22nd NIC National Conference will be no exception. This year’s breakout session panels will discuss, and perhaps debate, the important topics and current issues that are at the forefront of the seniors housing & care industry. You’ll get answers to the questions on everyone’s mind, engage in conversation with speakers and walk away with valuable insight and relevant information that will give you a competitive edge in the evolving landscape.
Come listen to an experienced panel of experts at the “Not All Valuations Are Created Equal: Pricing Variables Today and Tomorrow” breakout session.
Industry insiders will reveal and critique their current valuation strategies, from the buyer and seller perspectives, as used in current transactions. Everyone wants to make better valuation decisions. This session offers the information needed to make informed investment decisions.
Recent Events (July 2012)
Seniors Housing Occupancy Continues Recovery
NIC MAP® hosted its Q212 data release webcast for subscribers on Wednesday, July 17 providing a comprehensive update on market conditions and recent trends on the seniors housing and care industry.
Key topics addressed during the presentation included:
- Occupancy trends detailing recovery by metropolitan markets
- Levels of construction by metropolitan markets
- Industry outlook on occupancy, inventory growth and absorption